This blog is written by William McGrath and sets out his view of how we can manage DB pension schemes in the private sector. I do not take the private sector to include LGPS or the unfunded pensions that are threatened by recent statements by Reform. William’s background in on this link.
William McGrath
That Baroness Sherlock emphasised it was for trustees to provide leadership and make “Informed Decisions” was positive. She was responding to Baroness Altmann’s amendments to the Pension Schemes Bill. Better coordination between regulators as also promised (see attached summary). We have been supporting Baroness Altmann’s efforts to add to scrutiny of actuarial work.
The underlying need now is for clear risk-benefit analysis from a member and sponsor perspective. We think “Informed Decisions” links well to actuarial work to implement Technical Actuarial Standard 300 V2.1 P5. Below is a short summary of what could be taken as necessary for trustees to reach “Informed Decisions”.
The major area unaddressed in documents from consultants and providers covering run-on v buyout options is how much of pension liabilities is now covered by the PPF. This should be modelled. The answer needs to be set against the industry promoted idea of a “Gold Standard” which has lost carats. Factors to consider are the eased solvency requirements of life insurers and reinsurers and the drive to invest in global private debt. The lack of Government guarantee is always glossed over.
Also linked at the bottom of this blog are some related notes on the growth agenda and the benefits for boards taking a fresh look at their DB pension scheme.
Some considerations
Here are some considerations for trustees making “Informed Decisions” which may not be standardly addressed:
Defined Benefit Pension Schemes : Trustees to have Government backing to make “Informed Decisions” on strategy
- Ask for the Technical Actuarial Standard 300 V2.1 comparison of bulk transfers and Credible Alternatives led by “run-on”. It’s a regulatory “must” since April 2024 for actuaries to produce the comparison and to make it available to intended users.
- PPF is an excellent, well funded insurance safety net. Know the proportion of liabilities it covers should the sponsor fail immediately or at points in the future. What is the probability (1) of that happening; (2) of that happening when the scheme is not self funded to buyout levels. This topic is missing from most standard analyses.
- Actuarial work lacking scrutiny is a well known problem. Demographic assumptions are a good example. The actuarial profession’s in-house life expectancy tables (CMI) are industry standard in assessing risk transfers. Trustees should know that nearly all deals over the last 15 years are “out of the money” and schemes doing nothing have gained substantially. Trustees should be aware that CMI tables are produced by committees featuring current senior executives of insurers and reinsurers.
- Know the “balance of powers” within the scheme rules. Likely trustees set the investment strategy and sponsors can wind up the scheme. The “upside and veto” combination of stakeholders is a good back cloth for value sharing agreements.
- Tax rule changes make Authorised Payments a practical and attractive use of surpluses. Model a stream of payments (working well within guardrails) made from surpluses generated by returns above the discount rate and by prudence emerging in the demographic assumptions. Then you have a base case proposition for all stakeholders to consider.
- Schemes individually should look at their track record and the scheme’s funding position and the sponsor’s strengths, its interests and its ESG strategy. Then trustees can best assess what is in the best financial and wider interests of members.
There is more literature appearing on run-on and bulk transfer decisions. Is there a risk of disinformation? Who inspects the documents amongst regulators?
We are part of an industry group The Pensions and Growth Alliance. It sees the implementation of FRC’s Technical Actuarial Standard 300 V2.1 as being of real importance. TAS300 raises relevant maths and governance questions which trustees need the answers to in order to meet their fiduciary duties. Baroness Altmann in her remarks in the House of Lords raised the importance compliance by actuaries with FRC regulations and that there should be more scrutiny of actuarial work.
If more schemes are minded to run-on they can reasonably expect Government to respond. Government can look again at the remaining limitations on PPF cover; the tax incentives to invest in UK productive assets and tax rates on surpluses recycled to support current pensions.
Three short articles to download
Ensuring Trustee Accountability in Pension Surplus Distribution: Debate on Amendment 13
A debate in the House of Lords led by Ros Altmann
Optimizing UK Defined Benefit Pension Strategies for Economic Growth
Explores DB pension risk-benefit analysis, regulatory impacts, value sharing, and investment strategies to boost UK economic growth and shareholder value.
Optimizing UK Defined Benefit Pension Strategies for Economic Growth
Explores DB pension risk-benefit analysis, regulatory impacts, value sharing, and investment strategies to boost UK economic growth and shareholder value.